“The future is digital, prepare for a digital future’’ we have heard this clarion call over and again. While trying to figure it out, we are already in that future. The digital revolution is here with us, strongly altering our social order and inspiring undreamed-of business models. All economic activities have gone digital including elementary ventures like hawking and farming. The very basic social interactions like greetings have generated multi-billion dollar enterprises.
The entire mankind is in awe of the unlimited possibilities, job opportunities and millionaires churned by this digital transformation. Guess who is also celebrating with us? The taxman, and when the taxman celebrates we celebrate along, it is for our common good. Towards this end, enabling legislation has been created to bring incomes from the digital marketplace to tax. The Finance Act 2020 introduced Digital Service Tax (DST) as a tax that is payable on income derived or accrued in Kenya from services offered through a digital market place. DST is payable at 1.5% of the gross transaction value effective 1<sup>st</sup> January 2021.
Introduction of tax on digital activities raises some fundamental questions like how will invisible activities be taxed; this is well addressed in the fine print. The second issue has been why tax this nascent sector, the argument being it’s a sector supporting youth entrepreneurs and artists. This narrative sounds valid on the premise that the budding economic sector needs to be nurtured. However, if we advance this argument, then there will be another sector more deserving not to be taxed than another. It is true that the taxman is seeking to raise more revenue but there is more to it than just revenue.
The cardinal principle in taxation is equity and every tax aspect has to be scrutinized through the lens of this principle. Equity can loosely be translated to mean fairness. To illustrate what fairness has to do with digital service tax, think of an online content creator raking in Sh.100,000 per month from YouTube, should that person be tax free while a school teacher earning Sh.40,000 is paying for the common goods? Shout with me, that it is unfair.
Neutrality is another dimension of the principle of equity. Neutrality means that the tax system should raise revenue without favor or discrimination against any economic choice. If taxes lead to preference of one economic sector over the other, the result becomes distortion of economic patterns which would otherwise be normally distributed.
This means if we have taxes in the brick and mortar business models but no taxes in the digital ventures, then we will be pushing the former to close shop. To put it in a simpler way, we will be asking a supermarket chain to close the outlets and start an online platform. It is okay for businesses to transform; it’s even encouraged but the motivation should not be shifting from a heavily taxed model to a tax free alternative. This digital service tax is seeking to level the playing ground.
The debate seems to be between traditional business models and digital economies, but there is a bigger picture to it. For decades now many, many countries, Kenya included, have been counting tax losses to the digital giants. Tax experts will call it tax base erosion and profit shifting (BEPS) which is the ugliest quandary hitting revenue bases especially so for developing countries.
To make this comprehensible, I walk you down the memory lane. In less than a decade ago, if you needed a textbook, you would walk to a shop in your nearest town and that bookseller was of course a registered taxpayer in Kenya. Today, it’s a different story. That book is availed to your gadget digitally. The taxes that ought to be paid to your beloved country are most likely lost to unknown tax haven.
Digital service tax is not just a matter between the state and its subjects. It is between us as a Nation and the invisible, invincible capitalistic forces. It is time to rally all citizens behind their flag. Digital service tax is a great step in the right direction.